Comments (3)

By AZ Advisory Team, October 22, 2009 1:29 pm

Will the defaults on commercial real estate loans  be enough damage to thrust the financial system back into chaos or hurt the broader economy?

What do you think?

Experts think it would contribute to more bank failures, but overall they won’t threaten the banking industry as a whole.

“The magnitude of the deterioration seems consistent with past recessions. It looks like a manageable problem,” Jeffrey M. Lacker said, president of the Federal Reserve Bank of Richmond.

For one thing, the $3.4 trillion figure is only about one-third the amount of residential real estate debt outstanding. Moreover, a healthy percentage of the $1.4 trillion in debt will be refinanced.

“As far as the impact of commercial real estate on the overall economy, I don’t think it’s going to be the next shoe to drop,” says Robert Bach, senior vice president and chief economist with Grubb & Ellis, a global commercial real estate services firm. “These problems are focused in regional banks and the Federal Deposit Insurance Corp. (FDIC) has a tested method of shutting those down on Friday and opening them on a Monday under the auspices of a bigger bank. These are not too big to fail banks. I don’t see [commercial real estate] as an unmitigated disaster—I see it as a repeat of what happened in the 1990s, but the economy can handle it.”

Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

Comments (1)

By AZ Advisory Team, October 16, 2009 4:42 pm

A report today says that Federal bank regulators are close to issuing guidelines aimed at encouraging lenders to work out distressed commercial real estate loans. Many financial institutions face the risk of incurring losses and bankruptcies as distressed borrowers fail to refinance or pay off their loans. Deutsche Bank AG has projected that commercial-real-estate losses for banks could end up being as high as $300 billion.

The guidelines come as regulators are bracing for many more bank failures, particularly at small banks with high exposures to commercial real estate loans. Commercial real estate loans are the second-largest loan type after home mortgages. More than half of the $3.4 trillion in outstanding commercial real estate debt is held by banks.

“Banks are vulnerable to significant further deterioration in their CRE loans,” said Federal Reserve Governor Daniel K. Tarullo. Regulators said high levels of these loans are concentrated in smaller banks, although regional and large banks also have exposure to problems in these areas.

Sheila Bair, Chairman of the Federal Deposit Insurance Corp.  told a Senate subcommittee that reworking the terms of these loans could help banks avoid larger losses. She likened it to the push regulators made last year for banks to rework troubled residential mortgages. Reworked commercial real estate loans “should be encouraged, not criticized. We are encouraging banks to restructure these loans,” she said. ”

Mr. Tarullo said the types of loans causing the most problems are construction and development loans, not investments on existing properties. One reason is that Construction and development loans are likely not bringing any income or revenue for the borrower, making it much easier to fall behind.

Do you welcome this development? What do you think should be done? Let us know.

Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

Comments (1)

By Alex Zylberglait, September 28, 2009 1:35 pm

Lenders, in many cases, are working with borrowers on a modification of loan terms and avoid foreclosures. Buyer interest has been increasing as more properties become available at realistic prices as sellers-backed financing increase making up 50% of transactions compared with only 11% a few years back.

Read the rest of this post from a section of the Marcus & Millichap Special Outlook on Government Programs and Maturities Report below.

Portfolio Lenders More Amenable to Commercial Mortgage Modifications

Many portfolio lenders are actively working with borrowers to modify loan terms and avoid foreclosures. The situation is more difficult for owners with CMBS loans, as multiple parties hold an interest in the mortgage. Delinquent CMBS loans also are transferred to special servicers that have strict limitations related to property foreclosures and distressed sales, further delaying a large inventory of discount sales coming to market.

Distress Spreading

Since the start of 2008, the volume of distressed commercial real estate has swelled to an estimated $115 billion. Distress was initially concentrated among failed development and condo conversion deals, but the office sector took the lead in the fall of 2008 as the financial crisis intensified. The composition of distressed properties has since shifted again, with retail properties now accounting for the greatest share, or 30 percent of the total, up from less than 10 percent one year ago. Of the core commercial real estate sectors, retail recorded the most significant speculative construction in recent years as developers chased, and even built ahead of, rooftops into far-reaching suburbs. The reversal of housing-related fortunes and shrinking stock portfolios have contributed to the loss of $13 trillion from the overall net worth of U.S. households since mid-2007, resulting in a drastic pullback in consumer spending and a growing propensity to conserve cash.

Commercial Lending at Bottom?

Commercial mortgage originations continued to decline during the first half of 2009, reflecting further reductions in loan demand and broad-based constraints on debt capital. In the first quarter alone, originations were down 26 percent from the fourth quarter of 2008 and were nearly 90 percent below levels reported prior to the onset of the credit crunch two years ago. Fannie Mae and Freddie Mac have recorded the lightest decrease in originations over the past year, as their multi-family loan portfolios continue to perform well.

With the exception of Freddie Mac’s recent securitization, CMBS issuance has been at a complete standstill since last June, while life insurance companies generally remain on the sidelines. Over the past several quarters, real estate investors have relied largely on commercial banks for new loans, which have become wary of originating large loans and increasing their risk exposure to individual assets. The limited amount of debt available from traditional lenders has resulted in a drastic increase in assumed or seller-backed financing in transactions, which now accounts for more than half of the marketplace, compared with only 11 percent a few years ago.

Read Part 1

***
Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

Comments (2)

By Alex Zylberglait, September 25, 2009 8:00 am

Wave of Maturing Commercial Mortgage Debt Approaching

The tight financing climate is not only hindering acquisitions but adding another layer of complexity and challenge for commercial property owners with maturing debt. In the next two years, an estimated $550 billion of commercial mortgage debt is scheduled to mature. A significant share of this debt is unlikely to qualify for refinancing without equity contributions by the owner. Issues could become more severe as debt originated from 2005 to 2007 matures, since loan-to-values (LTVs) during this period were at historically high levels, and many loans were underwritten based on overly optimistic occupancy and rent growth assumptions. The impact on the market is likely to be substantially minimized by lenders’ focus on workouts and modifying loan terms, at least in the short term.

Delinquency Rates Rising

During the first quarter of 2009, CMBS delinquency reached 1.85 percent, up from less than 0.5 percent early last year and the highest level on record. The delinquency rate for loans issued by banks and thrifts jumped to 2.28 percent in the first quarter, a 90 basis point rise from six months earlier and on par with the rates reported in the mid-1990s. Commercial mortgage delinquencies among life insurance companies Fannie Mae and Freddie Mac also have increased in recent quarters but remain low at less than 0.35 percent, as these lenders maintained conservative underwriting standards throughout the most recent real estate boom.

I’ll post part 2 on Monday, September 28, 2009.

Special thanks to my colleagues here at Marcus & Millichap, Erica Linn – Senior Analyst, and Hessam Nadji – Managing Director.

***
Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.